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Canary in the Lava Tube

November 22, 2010

Weekly Market Commentary 11-22-10

I rarely write about local issues here in Oregon as this blog is received by thousands of people throughout the United States. Generally, Oregon issues aren't that relevant to the macro picture in the economy.

However, something very interesting took place in Oregon this week that did not pick up very much attention here or throughout the rest of the US.

Market Clearing Activity

I have always maintained in my past posts that one of the biggest challenges for the US economy is the lack of market clearing activities. This is the ability for assets (houses, hotels, office buildings, businesses) to be re-priced at levels that allow those assets to be purchased by new buyers that can then operate and utilize those assets appropriately and with more productivity.

In the past, such strong government intervention into clearing forces: modified mortgages, stress tests on banks, credit standards modification, higher capital ratios, TARP, TALF and many other programs I can't recall, delays the ability of the free market to adjust quickly. While the economy was saved from catastrophe by these actions the unintended consequences was a delay in asset movement and a prolonged, slow and sluggish recovery.

Back to Bend, Oregon.

What those of us in Oregon know is Bend, Oregon was the hottest real estate market in the country. According to MONEY Magazine, prices rose 130% from 2000 to early 2007. Since then prices have dropped 34% (http://bit.ly/9TcrE9)

Banks didn't write down assets quickly that they had loans against, jobs disappeared (especially construction), the service industry collapsed, golf courses closed or modified their exclusive membership programs and the list of devastation goes on and on. The local banks that needed to clear the assets off their books failed or at minimum their stock prices collapsed. Likely, you have heard or experienced similar circumstances in your community. Below is a 10 year stock price chart for Cascade Bancorp (CACB) which is the largest full service community bank in the Bend area.

Last Week In Bend Oregon

This last week in Bend two events took place that struck me as very exciting. Cascade Bancorp (Bank of the Cascades) received a major cash infusion with some new owners. They received 177 million dollars in exchange for 87% of the bank (http://bit.ly/cUZrtD). Good. What's even more fascinating is who made the buy. It was none other than noted bottom feeder, billionaire Wilbur Ross along with his pals at Leonard Green Partners. Wilbur Ross shorted the housing market at the peak and both firms are the best at finding bottoms in markets and taking advantage of them. In my mind, they have reprised the bank and will likely allow the bank to now clear their books of overpriced real estate. This is a much needed market clearing activity to get the Bend economy going again.

The second event was a direct market clearing activity. One of Oregon's most respected private companies, Jeld-Wen, the global leader in windows and doors just sold massive amounts of resort real estate in Oregon (http://bit.ly/d1ZC3Q). Knowing the players at Jeld-Wen like I do they are very smart managers and likely sold to allow them to focus on their core business. To me, this is another sign of market clearing activity in the worst real estate market in the country.

Could this be the bottom for:

Real estate in Bend?

In Oregon?

Perhaps the Country

A stretch, but perhaps. The tea leaves look good to me:

a terrible collapse in prices

an awful follow on economy

smart money Jeld-Wen selling assets

a bank getting needed capital infusions based upon likely significant losses in its real estate book

really smart buyers with billions of dollars to invest breaching the void and making a bet.

If there is such a thing as a "canary in a coal mine" then this could be one. Since, there are no coal mines I know of in Bend we should call it a "Canary in the Lava Tube" as we have lots of those here in the Cascade Mountains.

A quick hit on the market:

This week ended official earnings season on Tuesday. While the markets fell apart during this earnings season as it drew to a close the markets regained some of its strength. Below is chart of the S&P 500 since October 7th when Alcoa kicked off Q3 earnings season:

The relatively good news (according to Bespoke Investment Group) is 64.6% of companies beat their earnings estimates and 62.1% beat their revenue estimates. It could be worse.

What's even more promising is companies continue to guide higher in the coming quarter. See another Bespoke chart below.

My investment themes continue to be:

Luxury Goods with growing emerging market exposure

Weak dollar opportunities - exporters

Select technology - specifically business processing

Media (Print that is adapting to on-line)

Rare Earths (again see our Tweets on this)

Emerging Markets Debt and Equity that is driven by US dollars finding better investment environments

Mega Cap US companies that are finding great margins with little top line growth, especially exporters